Question

Which one of the following commences on the day inventory is purchased and ends on the day the payment for that inventory is collected? Assume all sales and purchases are on credit.

a.Inventory period
b.Accounts receivable period
c.Accounts payable period
d.Operating cycle
e.Cash cycle

Answer 1

The cash cycle begins when inventory is purchased and ends when payment for that inventory is collected. It includes the operating cycle but subtracts the accounts payable period to account for the time the company has before paying its suppliers.

Step-by-step explanation:

The time that commences on the day inventory is purchased and ends on the day the payment for that inventory is collected is known as the cash cycle. The cash cycle is a key component of a company's working capital management and measures the time between the outflow of cash to purchase inventory and the inflow of cash from sales. It is calculated by taking the operating cycle and subtracting the accounts payable period.

The operating cycle is the sum of the inventory period (the time it takes to buy and sell inventory) and the accounts receivable period (the time it takes to collect the receivables from sales). The cash cycle can be viewed as the operating cycle minus the accounts payable period (the amount of time the company has before it needs to pay its suppliers).